This content originally appeared in the MSE weekly email on 20 May 2015.
The election of a Tory government cements planned changes to savings. From April 2016 the new personal savings allowance will mean the first £1k/year of savings interest basic-rate taxpayers earn is tax-free (higher-rate taxpayers £500).
Great, but many people's savings accounts and cash ISAs pitifully pay under 0.5%, so the boon's limited. Complaining doesn't help; action is needed.
Check your rates then see if any of these tricks boost it. I've only included accounts covered by the £85,000 per person, per financial institution savings safety limit...
1. Make your bank account pay you up to 5%.
A raft of bank accounts now pay higher in-credit interest than top savings. These loss-leading rates aim to suck people into switching, but there's no reason not to take advantage.
Santander 123* pays 3% AER variable if you've £3,000 to £20,000 in it. Other banks pay higher rates, but as you can save more in it, it can pay up to £592/year interest (pre-tax), compared with next biggest Club Lloyds' £197.
It does have a £2/month fee, but for most that's easily covered as it pays cashback on direct debits, eg, 3% on mobiles, 2% energy, 1% water. This alone adds up, as Hannah tweeted: "£260/yr cashback. Mortgage, b'band, phones, TV."
If you've less to save, the winner depends on exactly how much. Here are the top picks (with work they can be combined, see 5% Savings Loophole):
|In-credit interest (AER)||Needs standing order / direct debit?||Min monthly pay-in|
|Santander 123*||3% on £3,000-£20,000||Yes, min 2||£500|
|Club Lloyds*||4% on £4,000-£5,000||Yes, min 2||£1,500|
|Nationwide FD*||5% up to £2,500 for 1yr (i)||No||£1,000|
|TSB Classic Plus*||5% up to £2,000 (ii)||No||£500|
|(i) 1% after. (ii) Must register for online banking. FULL info: Best Bank Accounts|
What qualifies you to get the interest? You usually need to pass a credit check (though they're not normally too harsh), and meet the 'min monthly deposit' (how they ensure you pay your income in there eg, a £500/month pay in = £6,000/year salary). Full account-by-account help in Top Bank Accounts.
2. Part of a couple? Use it to gain.
If one of you pays tax at a higher rate, then providing you trust each other, put non-ISA savings in the lower taxpayer's name and you'll take home more.
If you're using the bank account trick above, some accounts (such as Santander) allow you to open an account each and one joint account, so that could be £60,000 covered (you must still meet all the terms).
3. Quick: Get a tax-free FREE £125 plus 6% interest or £5/month.
The other bank account savings route is to plump for an account offering a free switching bribe plus a linked high-rate savings product. You'll need to use its switching service (and follow the 'what qualifies' rules in point 1). Unlike savings interest, this switching bribe is TAX-FREE.
- Free £125 + 6% linked savings & top service. First Direct* (min-monthly deposit £1,000) has won every customer service poll we've ever done. Till 31 May via this link, it offers switchers £125 (£100 after), plus has a linked savings account where if you save £25 to £300/each month for a year you get a fixed 6% AER.
- Free £125 + earn £5 a month. Until 31 May Halifax Reward* (min-monthly deposit £750) pays switchers £125 (£100 after). Plus it pays you £5 every month you're in credit – which alone beats the best interest after tax for those saving less than £1,500 in the top high-interest bank savings.
- Free £100 M&S gift card + linked 6% savings & NO min pay in. Switch to M&S Bank* and you get a gift card worth £100, plus it has a linked regular savings account where if you save £25 to £250/each month for a year you get a fixed 6% AER. Better still, unlike other accounts, you don't need to make a monthly deposit.
- Free £150 + 2% savings. Clydesdale* (min-monthly deposit £1,000) currently offers £150 if you switch to it, and a lower-but-still-decent 2% on up to £3,000 – good for smaller savers wanting the best of both worlds.
When does free cash beat bank savings interest? If you've got £10,000+ Santander 123* almost always wins; below that, it's more complex. If you're willing to switch annually, or more often, then bagging free £100s can net you larger amounts (though constant switching can wobble your credit file).
If you just want to switch and stick, then £100 is equivalent to a year's after-basic-tax interest on around £3,000 at 4%. Yet you have to factor in that you'd still be saving somewhere else, perhaps the linked regular saver, or even just in a top savings account. Thus the gain's the difference between the two.
So there's no definitive answer. If you pushed me for a VERY rough rule of thumb, over £4,000 using your bank for high interest wins – below that, using it for free cash and other top savings is likely to win.
4. Earn 2.1% and protect savings from tax.
A cash ISA is just a savings account where you don't pay tax on the interest, while every £100 earnt in normal savings nets a basic-rate taxpayer £80 and higher-rate £60. In a cash ISA you get the £100. So if rates are equal it wins.
You can put up to £15,240 in per tax year (6 April - 5 April) and once in, it stays tax-free year after year, so fill it up every year and it can be very serious cash. FULL best buys and calcs: Top Cash ISAs and Top ISA Transfers
- Earn 2.1% fixed for 4years with access to your cash: Coventry BS pays 2.1% AER fixed for four years, but you can withdraw by closing the account early, losing just 120 days' interest. So close it after 1year and you effectively get 1.41%, after 2years 1.75% meaning you get decent rates and some flexibility.
- Top fixes for ISA transfers as well as new money. If you want to shift past poor-earning ISAs in as well as or instead of new money, the Skipton BS 1year fix (min £500) is 1.62% AER, 2year is Kent Reliance (min £1,000) at 1.85% AER, 3year is State Bank of India (min £5,000) at 2.3% AER.
- Top easy-access cash ISA: If you need to withdraw cash whenever you want, NS&I pays 1.5% AER variable but doesn't allow transfers. For that you'll need Post Office at 1.41% AER variable (min £100).
- New Help to Buy ISAs: From the autumn, first-time buyers will be able to get these ISAs where for every £200 you put in, the Government adds £50. If you want one, don't open a cash ISA now. Full info in Help2Buy ISA.
- Do cash ISAs beat top bank savings? On pure rate, even after basic tax, the bank savings win –for higher-rate taxpayers it's closer. Yet saving in an ISA has other boons. See my full Santander 123 vs cash ISAs analysis.
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5. If you're putting aside cash every month, earn over 3%.
Regular savings accounts often pay high interest as it's only on a small amount for a short time. The top rates are for products linked to current accounts (listed in point 3 above). Yet there are some decent paying deals open to all.
6. Mix and match to maximise every penny.
I'm often asked "What's the best savings account?". There's no easy answer. It depends on how much you're saving, how often, whether you need access to it and more.
Nor is there often one right answer. The goal's for every penny to flow where it earns most, such as putting a lump sum in a fixed-rate ISA and money you put aside each month in a top regular saver. Combining accounts this way often wins. See the savings fountain for more help.
7. Lock your cash away to boost rates and earn up to 2.5%.
Fixed-rate savings have two big advantages: a) rates are usually higher b) rates are guaranteed. Yet in return you need to forgo access to the cash for that time.
Over one year First Save (min £1,000) is the winner at 1.9% AER; for three years it's Paragon Bank (min £1,000) at 2.5% AER. Yet with today's low interest rates remember the longer you fix for the more risk, as if rates do rise, you can't ditch and switch. Full best buys and calcs in Top Fixed Savings.
8. While 1.4% for the top straight easy access savings deal sounds poor, compare it to what you're getting.
These rates don't sound good, but before you pooh-pooh them, check your rate. It may be shockingly less. If so, ditch and switch. Do also check if you've a local credit union or building society giving locals a special rate. Or ask your current bank if it has a 'loyalty deal'.
9. Don't forget Premium Bonds if you're a higher-rate taxpayer.
Premium Bonds are savings accounts where the interest you earn is tax-free and based on a monthly prize draw. The currently published 'prize rate' is 1.35%.
This describes the 'mean' average (think back to school maths) you'll win. Thus it predicts someone with £100 will win £1.35 a year. Yet that's impossible, as the smallest prize is £25. In fact, for every 20 people with £100 in, over a year 19 must win nowt for one to win £25+.
A far better pick of what you'll win is the median 'average'. It shows if you lined everyone up in terms of winnings, what the middle person would win. It can be depressing, eg, on £1,000 over a year, the median win's still nada.
Find out what you're likely to win
Our unique Premium Bond Probability Calc predicts your odds of winning.
Full analysis in Premium Bonds – are they worth it? but in summary, they can on average produce decent returns compared with normal savings for higher-rate taxpayers with decent sums (ie, above £10,000).
10. Prepared to up the risk? Peer-to-peer 'savings' pay up to 6.8%.
They call them savings, but in truth they're halfway between savings and investing (so there's no UK £85,000 savings safety protection). Current top rates for 1year are 3.9%, 3year 5.5% and 5year 6.8%. Yet it's a totally different concept so read our full peer-to-peer savings help. Or of course you could just invest straight in a Top Stocks & Shares ISA.
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Duplicate links of the * links above for the sake of transparency, but this version doesn't help MoneySavingExpert.com: Club Lloyds, Clydesdale, First Direct, Halifax Reward, M&S Bank, Nationwide, Santander 123, TSB Classic Plus